Foreign
exchange is always traded in currency pairs, such as EUR/USD (Euro/U.S.
Dollar.) All trades are the purchase of one kind of currency with another.
The first currency in the pair is referred to as the base currency. The
base currency is the one that provides a baseline for the purchase or
sale. Think of the currency pair as an instrument to be bought or sold.
You are buying either the Euro or the U.S. Dollar in either case.
The following are some scenarios that help to explain these pairs and
how to think in terms of the basis currency:
EUR/USD
BUY if the U.S. securities markets are to continue in a bear market and
the Euro is going to go up against the U.S. Dollar. SELL if you expect
Wall Street to recover and the U.S. Dollar to climb against the Euro.
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USD/JPY
BUY if you expect the Yen is about to be weakened in support of Japanese
trade. SELL if Japanese equity is leaving the U.S. financial markets
to make stronger investments at home.
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GBP/USD
BUY if growth in the U.K. will continue to lead G7 nations. SELL if
you believe the British are about to adopt the Euro, expecting the Pound
to weaken against the U.S. Dollar as it is devalued in anticipation
of the merger.
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USD/CHF
BUY the Swiss Franc if you think that the impact of international instability
is overvalued. SELL if you believe that conservative investors will
be seeking out traditional havens such as Switzerland as a hedge against
weakness in the U.S. economy.
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EUR/CHF
BUY if you expect that the Swiss government to devalue the currency
to accelerate exports to Europe. SELL if inflation takes hold in Germany
and France, increasing the value of the Swiss Franc against the Euro.
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AUD/USD
BUY if world commodity prices are going to boost the commodity-based
export market in Australia. SELL if the Australian economy shows signs
of recession or unfavorable trade imbalances are emerging.
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USD/CAD
BUY if the US economy is going to rebound faster than Canada. SELL if
the Canadian Dollar is fundamentally undervalued against the U.S. Dollar.
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NZD/USD
BUY if you think the notoriety of the “Lord of the Rings” films will increase
income from tourism. SELL if you expect international uncertainties
to continue to depress the tourist industry.
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EUR/GBP
BUY if you believe the U.K. is about to adopt the Euro, expecting the
Pound to weaken as it is devalued prior to the merger. SELL if you believe
that the U.K. economy will grow at a faster rate than the European Union
as a whole.
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EUR/JPY
BUY if the Japanese banking crisis is expected to worsen. SELL if you
believe that Europe is going into recession, anticipating the Euro to
fall against the Yen.
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GBP/JPY
BUY if the Bank of England is going to raise interest rates. SELL if
the Nikkei index is about to outperform the FTSE.
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CHF/JPY
BUY if you believe that international instability will cause an oil
price spike, impacting the import-dependent Japanese economy. SELL if
you expect regional conflicts will result in lower oil prices, making
Japanese markets more attractive than the conservative Swiss Franc.
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GBP/CHF
BUY if you expect the Bank of England to raise rates. SELL if you believe
the British are about adopt the Euro, anticipating a weaker Pound against
the Swiss Franc as it is devalued in anticipation of the merger.
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EUR/AUD
BUY if Australia is heading towards recession. SELL if you expect international
commodity prices are going to increase dramatically.
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